July 31 (Bloomberg) -- President Barack Obama said tonight
that leaders of both parties in the U.S. House and Senate had
approved an agreement to raise the nation’s debt ceiling by $2.1
trillion and cut the federal deficit by as much as $2.5 trillion
over a decade, a deal that must now be sold to Congress.

“The leaders of both parties in both chambers have reached
an agreement that will reduce the deficit and avoid default,”
Obama said at the White House. “This compromise does make a
serious down payment on the deficit-reduction we need. Most
importantly it will allow us to avoid default.”

Congressional leaders reached a bipartisan agreement to
raise the debt ceiling by at least $2.1 trillion, sufficient to
serve the nation’s needs into 2013. They are preparing to sell
to members the deal to cut $917 billion in spending over a
decade, raising the debt limit initially by $900 billion, and to
charge a special committee with finding another $1.5 trillion in
deficit savings by the year’s end. They confront an Aug. 2
deadline for approval of the agreement.

“This goes a long way to reducing the risk of default by
the U.S. government,” Tom Quarmby, head of regional banking
research at Barclays Capital in Hong Kong, said in a Bloomberg
Television interview. While many hurdles remain, the deal “gets
them out of a lot of trouble in the near term,” he said.

Market Reaction

The dollar and oil prices climbed, and gold fell. U.S.
currency rose 1.3 percent to 77.79 yen and 0.2 percent to
$1.4376 per euro at 9:44 a.m. in Tokyo. Gold slid 1.1 percent
to $1,610.70 an ounce. Crude oil for September delivery rose 1.6
percent to $97.19 a barrel on the New York Mercantile Exchange.

With just two days left before the Treasury Department had
said the nation would default without additional borrowing
authority, both sides made concessions. Republicans dropped
their insistence on withholding some of the borrowing authority
until future spending cuts had been made and a balanced budget
amendment to the Constitution had been passed by Congress.

Tax Revenue

The White House agreed to forgo an automatic tax increase
as one of the consequences to kick in if no debt-reduction law
is enacted by Christmas.

Obama has an opportunity to increase revenue in the future
if he opts to allow tax cuts enacted under George W. Bush to
expire as scheduled in 2013. Even if Obama lost his re-election
campaign next year, he could veto legislation to extend those
cuts before leaving office -- raising $3.5 trillion.

Shortly before Obama spoke, Senate Majority Leader Harry
Reid and Minority Leader Mitch McConnell took to the Senate
floor to endorse the accord. Reid said “reasonable people”
were able to agree on a deal and the nation and Congress were
“moving forward together.” Reid, of Nevada, said Senate
Democrats would meet tomorrow at 11 a.m. to discuss the package.

The agreement calls for cutting $917 billion over a decade
and immediately raising the debt limit by $900 billion, then
forming a special congressional committee to find another $1.5
trillion in deficit savings by year’s end, according to a
summary Speaker John Boehner circulated to House Republicans.

Automatic Cuts

If the super-committee’s work failed to yield at least $1.2
trillion in debt reduction, sweeping automatic spending cuts
would go into effect. These would inlcude cuts in defense
programs and Medicare, although other programs -- including
Social Security, Medicaid veterans, and civil and military
retirement -- would be exempted. Cuts to Medicare spending
would only affect provider reimbursement rates, not benefits,
and would be limited to 2 percent.

In a nod to fiscally conservative and Tea Party-aligned
lawmakers who wanted to condition any borrowing boost on passage
of a balanced-budget amendment to the Constitution, the measure
calls for a vote of both houses of Congress on such a measure
sometime after Oct. 1 and by the end of the year.

It would allow Obama to ask for the second debt-ceiling
increase after the super-committee’s deficit-reduction
recommendations were enacted or after the constitutional
amendment was sent to the states.

Still, even if neither of those things happened, Obama
would be able to get the remaining $1.5 trillion debt-ceiling
extension and the automatic spending cuts would go forward.

Congress could try to block the borrowing increase with a
disapproval resolution, yet would almost certainly fail to
muster the two-thirds majorities in the House and Senate to
override the president’s veto.

Boehner Apology

Boehner, of Ohio, apologized to rank-and-file Republicans
in a conference call for having to rush the measure to the floor
as soon as possible, while telling them it represented a victory
over Obama and his debt-ceiling demands, according to a
Republican aide familiar with the discussion.

Boehner said he had forced Obama to give up his initial
demand for a “clean” borrowing increase -- one without
anything attached -- as well as his later call for a “balanced
package” that included revenues as well as spending cuts to
shrink the deficit. The deal, Boehner said, is all spending cuts
and has nothing that violates Republicans’ principles.

Both sides encountered resistance to the accord from within
their own ranks.

Republican Senator Ron Johnson said he was “highly
concerned” about the size of the cuts, saying they were too
small to make a real difference in reining in the debt.

Not a ‘Fix’

“I’m afraid this is not going to fix the problem, and
that’s the one reason I came here,” said Johnson, a first-termer elected with Tea Party support.

Socially liberal groups and lawmakers expressed anger at
the package because it omits revenue increases while cutting
deeply into government spending and threatening still more
reductions to safety-net programs such as Medicare.

“This deal does not even attempt to strike a balance
between more cuts for the working people of America and a fairer
contribution from millionaires and corporations,”
Representative Raul Grijalva, the Arizona Democrat who leads the
Progressive Caucus, said in a statement. “I will not be a part
of it.”

‘Balanced Approach’

Obama and congressional Democrats have insisted that any
deal be a “balanced approach” that includes revenue, raising
questions about whether the president would find substantial
support from his party for the plan.

While the compromise shaping up will probably assuage
immediate concerns about default in financial markets, “this
relief will be short,” said Mohamed A. El-Erian, chief
executive officer of Pacific Investment Management Co., the
world’s largest manager of bond funds.

If Standard & Poor’s “sticks to what it said, it will
downgrade” the U.S. debt following the deal, El-Erian said in
an interview on ABC News “This Week.”

S&P, which has given the U.S. a top AAA ranking since 1941,
said on July 14 that the chance of a downgrade within three
months is 50 percent, and a reduction may occur as soon as
August if there isn’t a “credible” plan to reduce the nation’s
deficit.

The agreement “does nothing to restore household and
corporate confidence, so unemployment will be higher than it
would have been otherwise,” El-Erian said. “Growth will be
lower than it would be otherwise. And inequality will be worse
than it would be otherwise.”